New York Court Holds That the “Lesser of Two” Doctrine Limits Recoverable Damages in Subrogation Actions

Michael DeBona | White and Williams | June 12, 2019

In New York Cent. Mut. Ins. Co. v. TopBuild Home Servs., Inc., 2019 U.S. Dist. LEXIS 69634 (April 24, 2019), the United States District Court for the Eastern District of New York recently held that the “lesser of two” doctrine applies to subrogation actions, thereby limiting property damages to the lesser of repair costs or the property’s diminution in value.

In New York Cent. Mut. Ins. Co., New York Central Mutual Insurance Company’s (New York Central) insureds, Paul and Karen Mazzola, suffered a fire to their home. After the fire, New York Central paid the Mazzolas $708,465.74 to repair the property. New York Central brought a subrogation action against TopBuild Home Services, Inc. (TopBuild), alleging that the fire was caused by negligent work performed by TopBuild. New York Central sought to recover the repair costs it paid to the Mazzolas. TopBuild conceded liability but disputed the proper measure of damages.

TopBuild filed a motion for partial summary judgment, arguing that under the “lesser of two” doctrine, New York Central could recover only the lesser of the costs to repair the property or the property’s diminution in value. TopBuild, therefore, asserted that New York Central was not entitled to the repair costs of $708,465.74 but, rather, could recover only the property’s decline in value following the fire – approximately $250,000.[1] In response, New York Central argued that New York’s “lesser of two” doctrine does not apply to subrogation actions because an insurance company cannot mitigate the payment it makes to its insured.

The Eastern District of New York found New York Central’s argument unavailing. The court found that a subrogating carrier must step into the shoes of its insured and, therefore, the carrier could not recover more than its insured was legally entitled. Accordingly, the court granted partial summary judgment for TopBuild, holding that, in subrogation actions, “the proper measure of damages for permanent injury to real property is the lesser of the decline in market value and the cost of restoration.”

New York Cent. Mut. Ins. Co. serves as a reminder that subrogating insurers step into their insured’s shoes. Thus, although insurers may issue a contract of insurance that allows an insured to collect replacement and/or restoration costs, insurers can recover the amount it paid its insured only if state law allows the insured to recover that amount from the tortfeasor had the insured sued the tortfeasor directly.

[1] Defendant’s expert determined the diminution in value to be $245,000 while the plaintiff’s expert determined that the diminution in value was $270,000. Because the only issue before the court was whether the “lesser of two” doctrine applied, the court did not need to resolve the party’s dispute as to the diminution in value.

Can My Business Recover Additional Income Loss If Code Upgrades Are Delaying the Time to Complete Repairs?

Iris Kuhn | Property Insurance Coverage Law Blog | May 31, 2019

Business Interruption coverage protects the potential earnings of the insured business while its operations are suspended as a result of damage caused by a covered peril. The period of restoration has a direct effect on the actual loss suffered. A typical definition in most ISO forms of the “period of restoration” is:

The period of time that begins at the time of loss and ends on the date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality or the date when business is resumed at a new permanent location.

Under this provision, if the business owner repaired, rebuilt, and resumed operations within the policy time limits, the period of restoration is calculated from the date of the loss by a covered peril until the “actual time” it took to rebuild and resume operations, subject to certain offsets.

However, compliance with building codes often extends the time to rebuild or restore suspended operations. Substantial delays may be expected when the building upgrades require the existing structure to be demolished before reconstruction can begin; or when rebuilding on the present site is prohibited and a new permanent location must be found. Depending on the nature and size of the business, this could translate into a significant loss of income. The question is then, does my policy provide coverage for the additional loss of earnings my business suffered as a result of the delay to comply with current building codes requirements?

Many business interruption coverage forms exclude or limit coverage for the delay arising out of the application of any ordinance or law that increases the period of restoration.

The standard ISO CP 00 30 Business Income (and Extra Expense) Coverage Form provides in pertinent part:1

‘Period of restoration’ does not include any increased period required due to the enforcement of any ordinance or law that:

(1) Regulates the construction, use or repair, or requires the tearing down of any property

The period of restoration definition specifically excludes coverage for any additional time required to rebuild as a result of law and ordinance requirements. ISO endorsement CP 15 31, the Ordinance or Law – Increased Period of Restoration may be utilized to overcome the effect of this exclusion. It states in pertinent part:2

A. If a Covered Cause of Loss occurs to property at the premises described in the Declarations, coverage is extended to include the amount of actual and necessary loss you sustain during the increased period of “suspension” of “operations” caused by or resulting from a requirement to comply with any ordinance or law that:
1. Regulates the construction or repair of any property;
2. Requires the tearing down of parts of any property not damaged by a Covered Cause of Loss; and
3. Is in force at the time of loss.

This endorsement provides coverage for the additional time needed to repair or reconstruct damaged property in accordance with any law or ordinance. As we approach the hurricane season, business owners are encouraged to speak with their insurance agents about their business needs. Among other things, they should discuss not only complete coverage for the increase cost of construction, but also coverage for the period of time required to adhere to the code upgrades.
1 ISO CP 00 30 10 12
2 ISO CP 15 31 10 12

Subcontractor Entitled to Defense for Defective Work Causing Property Damage Beyond Its Scope of Work

Tred R. Eyerly | Insurance Law Hawaii | May 1, 2019

    The Illinois Court of Appeals found the subcontractor was owed a defense for alleged property damage caused by its faulty workmanship, but outside its scope of work. Acuity Ins. Co. v. 950 W. Huron Condo. Ass’n, 2019 Ill. App. LEXIS 208 (Ill. Ct. App. March 29, 2019).

    The condominium association sued its general contractor, Belgravia, for alleged defects allowing water to infiltrate and cause damage. Belgravia filed a third-party complaint against its subcontractors, including the carpentry subcontractor Denk & Roche. Denk & Roche held a CGL policy with two insurers during the relevant period, one with Cincinnati Insurance Company for the period January 1, 2000 through June 1, 2007, and another with Acuity Insurance Company, effective June 1, 2007, through December 31, 2013.

    Denk & Roche tendered its defense to both insurers. Cincinnati agreed to defend and contributed to a settlement of the AOAO’s claims. Acuity denied a defense, contending that the underlying claims did not trigger a duty to defend. Acuity’s declaratory judgment suit sought a determination that it had no duty to defend. Cincinnati intervened and argued it was entitled to equitable contribution from Acuity.

    On cross-motions for summary judgment, the trial court found that Acuity had no duty to defend.

    On appeal, the court noted that while a CGL policy would not insure a contractor for the cost of correcting construction defects, damage to something other than the project itself did constitute an occurrence under a CGL policy. Here, the duty to defend Denk & Roche turned n what qualified as damaged beyond “the project itself” where the insured was a subcontractor performing discrete work on a project and the subcontractor had no control over other aspects of the project. 

    From the eyes of the subcontractor, the “project” was limited to the scope of its own work. The precise nature of any damage that might occur for something outside of that scope was as unknown or unforeseeable as damage to something entirely outside of the construction project. Therefore, when the underlying complaint alleged that a subcontractor’s negligence caused something to occur to a party of the project outside of the subcontractor’s scope of work, there was an occurrence under a CGL policy, even though it would not be an occurrence from a general contractor or developer’s perspective. Consequently, the court drew a major distinction between coverage for faulty workmanship performed by a subcontractor versus a general contractor or developer. Summary judgment for Acuity was reversed.

    The court also found that Cincinnati was entitled to equitable contribution from Acuity for undertaking the subcontractor’s defense. The case was remanded for a determination on the exact amount of contribution to be made. 

“Rip-and-Tear Damages” In Construction: A Roadmap For Coverage Where None Existed?

Ashley Veitenheimer | Kane Russell Coleman Logan | May 22, 2019

The insuring agreement in most commercial general liability policies states that the carrier “will pay those sums that the insured becomes legally obligated to pay as damages because of…’property damage’ to which this insurance applies.” In addition, most policies exclude coverage for the defective work of the named insured. Questions have arisen, however, as to whether and when there is coverage for damages commonly known as “rip-and-tear,” which are those damages caused to other property by the necessity of removing, replacing, and correcting defective work.

Prior to 2015, Texas law held that rip-and-tear damages were covered if there was underlying covered property damage in the first instance. See Lennar Corp. v. Markel Amer. Ins. Co., 413 S.W.3d 750 (Tex. 2013). That all changed with U.S. Metals v. Liberty Mutual Ins. Group, Inc., 490 S.W.3d 20, 22 (Tex. 2015). In U.S. Metals, the Court appears to hold that damages are covered even when they are not “because of” property damage, leading to vexing issues for the insurance carrier regarding when the duty to defend is triggered and whether rip-and-tear costs are covered when they are not “because of” property damage.

In U.S. Metals, U.S. Metals sold ExxonMobil 350 flanges for use in constructing diesel units. When ExxonMobil conducted post-installation testing, it discovered that several flanges leaked and did not meet industry standards such that it was necessary to replace them to avoid the risk of explosion. For each flange, this process involved stripping the temperature coating and insulation (which were destroyed in the process); cutting the flange out of the pipe; removing the gaskets (which were also destroyed in the process); grinding the pipe surfaces smooth for re-welding; replacing the flange and gaskets; welding the new flange to the pipes; and replacing the temperature coating and insulation. 

After ExxonMobil sued U.S. Metals and the parties settled, U.S. Metals sought indemnification from its insurer. On appeal, the parties disputed whether the installation of the faulty flanges physically injured the diesel units.  The Court noted that “the installation of the leaky flanges…can certainly be said to have injured – harmed or damaged – the diesel units by increasing the risk of danger from their operation and thus reducing their value.” However, no physical injury resulted because ExxonMobil replaced the flanges in order to avoid the risk of such injury.

The Court concluded that the diesel units were physically injured in the process of replacing the flanges because the flanges were welded to the pipes, and the removal process “necessitated injury to tangible property, and the injury was unquestionably physical.”  That tangible property was the original welds, coating, insulation, and gaskets. Because the diesel units were restored by replacing the flanges, they were impaired property to which Exclusion M applied.[1] Id. But it also concluded that the insulation and gaskets were destroyed in the process and replaced such that Exclusion M did not apply. Therefore, the Court held that these rip-and-tear costs, were covered because the items were physically injured and constituted “property damage.”

After U.S. Metals was decided, the Western District of Texas issued an opinion illustrating the problems the holding created. In Travelers Lloyds Ins. Co. v. Cruz Contracting of Texas, LLC, the Western District relied on the U.S. Metals holding to conclude that rip-and-tear damages were covered. 2017 WL 5202891 (W.D. Tex. Sept. 7, 2017). There, Cruz, the subcontractor, was hired by D & D to install utility systems, which were later discovered to be faulty. D & D alleged that, in order to replace the sewer system installed by Cruz, it had to tear out and redo roadways, curbs, and parkways.

Based on U.S. Metals, the court found that D & D suffered property damage in the form of rip-and-tear damages “to access faulty equipment installed by an insured…”. The problem with this conclusion is that no damages “because of” property damage existed prior to the rip-and-tear process being undertaken. Rather, as the court concedes, the adjoining utility work was “not physically disturbed by Cruz’s defective work” but was “rendered useless by the defective work.” Consequently, the court apparently relied upon the loss of use as the trigger for the insurer’s duty to defend.

This, in turn, raises the pivotal issue of when the alleged property damage actually occurs. In other words, since there was no “property damage” prior to the tear-out and replacement of Cruz’s work – there was merely faulty work (which is typically excluded from coverage) – when did the “covered” property damage occur? The court’s opinion states that the property damage “occurred when the utility systems installed by Cruz failed testing, rendering them inoperable and unusable.”. Although the court relies upon Don’s Buildingfor this proposition, this is a rather questionable conclusion because there was no property damage prior to the damage caused in accessing the faulty work.[2]

Take as an example pipe work that is performed before pouring a concrete floor. No damage exists at the time the pipes are installed; however, there is later discovered a leak in one of the connections that requires replacement. If suit is filed merely alleging that the pipe was faulty and that the concrete needed to be torn out, is this sufficient to trigger a duty to defend in Texas because the rip-and-tear is in itself property damage? And, if so, does the insurer for the connection supplier owe a duty to defend the entire lawsuit when the concrete flooring, pipes, and other building components are damaged in an effort to repair and replace the connection? If that is the case, almost every suit for construction defects may plead a covered claim because it will involve rip-and-tear costs.

Equally confounding it the issue of “when is the occurrence.” If the rip-and-tear is itself the “property damage,” then can an insured create its own trigger for defense by alleging that the installation was improperly performed and required the rip-and-tear damages to replace the faulty connection? These are the questions created by the holding in U.S. Metals that have yet to be answered, but the Cruz holding certainly got this issue wrong. That is because U.S. Metals clearly identifies when the occurrence is:

We have further held that, for purposes of a duty to defend under an occurrence-based policy period, damage due to faulty workmanship “occurs” not at the time the damage manifests (when it is discovered or discoverable) nor when the plaintiff is exposed to the agent that will eventually cause the damage (when it is installed, presumably). Rather, under a straightforward reading of the policy, we concluded that “[o]ccurred means when damage occurred, not when discovery occurred.” Since a defective product that causes damage is not an occurrence until the damage actually happens, it would be inconsistent to now find that a defective product that does notcause damage is nevertheless an occurrence at the time of incorporation.

Cruz, however, held that the “occurrence” happened when the utility systems failed testing without any related property damage. This is one example of the myriad of questions created by the U.S. Metalsholding, relied upon by the Cruz court, and the lower courts’ application of the ruling, which may create the potential for a huge shift in coverage law as to when the duty to defend is triggered.


[1] Exclusion M denies coverage for damages to impaired property, which is defined as property that can be “restored to use by the…replacement” of the faulty flanges. Id.

[2] Interestingly, the Southern District relied upon U.S. Metals to conclude that rip-and-tear damages are covered when the utility of component parts is destroyed “[a]s a consequence of their having been encased in bad concrete.” See Lauger Cos., Inc. v. Mid-Continent Cas. Co., 2017 WL 8677353 (S.D. Tex. Aug. 2, 2017). This creates the same problems as Cruz and gives rise to the same concerns of when the duty to defend is actually triggered.

‘Matching Regulations’ Affecting Homeowners’ Insurance Claims: Viewpoint

Gary L. Wickert | Claims Journal | April 4, 2019

It remains one of the most difficult issues to deal with in the world of property insurance. Homeowners’ insurance policies usually contain a provision obligating the carrier to repair or replace an insured’s damaged property with “material of like kind and quality” or with “similar material.” They cover property damage resulting from “sudden and accidental” losses. When damage caused by fire, smoke, water, hail, or other causes results in a small portion of a home or building being damaged (e.g.,shingles, siding, carpet, cabinets, etc.), whether and when a carrier must replace non-damaged portions of a building in order for there to be a perfect match remains a point of contention. It is a matter of great importance to insurance companies because “matching” problems with a slightly-damaged section of roof or flooring can lead to a domino effect of tear out and replacement costs of many items that are not damaged. The problem of partial replacement is especially troubling where the damaged siding or shingles have been discontinued, making it virtually impossible to properly match. To replace only the damaged portion would result in an obvious aesthetic deficit due to a clear difference in the appearance of the replaced portion of the building from the portion that remains undamaged.

Would the entire structure need to be re-sided or the entire roof re-shingled? Or is it sufficient to replace just one wall of siding or just a few shingles? Whether or not the insurance company must pay to replace entire sections of the structure in order to bring the property back to its previous uniformity and aesthetics can bring various state insurance laws and regulations into play. On the one hand, many pundits claim that the terms of the insurance policy require the carrier to pay the cost to “repair or replace with similar construction for the same use on the premises.” They argue that “similar” doesn’t mean matching exactly. Others argue that coverage for “matching” and “uniformity” under a homeowner’s policy doesn’t exist without a specific endorsement. The truth lies somewhere in between and can vary greatly from state to state.

Replacement Cost Value (RCV) vs. Actual Cash Value (ACV) Policy

There are two primary valuation methods for establishing the value of insured property for purposes of determining the amount the insurer will pay in the event of loss under a homeowner’s policy:

  • Replacement Cost Value(RCV): This method is usually defined in the policy as the cost to replace the damaged property with materials of like kind and quality, without any deduction for depreciation. It pays an insured for the value of replacing the damaged property without deduction for deterioration, obsolescence, or similar depreciation of the property’s value. The carrier assumes the cost of paying the full cost of repairing or replacing the damaged property.
  • Actual Cash Value(ACV):This method pays an insured for a similar item less depreciation. ACV is ordinarily determined in one of three ways: (1) the cost to repair or replace the damaged property, minus depreciation; (2) the damaged property’s “fair market value” (“FMV”); or (3) using the “broad evidence rule,” which calls for considering all relevant evidence of the value of the damaged property. The insured bears the difference between the depreciated value of the damaged property prior to loss and the higher cost of repairing or replacing it.

The issue of “matching” or “uniformity” in first-party homeowners insurance claims is one that lends itself to RCV policies. If property is only partially damaged, the carrier takes the position that it is only required to pay for repair or replacement of the limited portion of the property that is damaged. The insured argues that replacing only the damaged property restores the functionality of the roof but does not fully replace the damaged property because the replaced property does not match the existing property. For example, a roof had a uniform appearance, and uniformity has a significant effect on value. Therefore, the proper measure of RCV is the cost to replace the entire roof to restore the uniform appearance. This is known as the issue of “matching” or “uniformity.” The issue is whether the carrier has to “match” the damaged property to the undamaged property in order to return it to its previous “uniform” appearance and restore the entire home to its condition prior to loss.

Whether the policy is an RCV or ACV policy can make a big difference. ACV coverage pays an insured for a similar item less depreciation. RCV coverage compensates an insured for the value of replacing the damaged property without deduction for deterioration, obsolescence, or similar depreciation of the property’s value. An insurer with an ACV policy may be able to exercise the option to repair, restore, or replace the damaged property itself rather than having to pay for the cost to repair the property with property of like kind and quality. Moreover, some “matching” regulations only apply to RCV policies.

A good illustration of the matching/uniformity problem is found in a 2014 Minnesota federal district court case in which a manufacturer discontinued the shingles used on the insured’s roof, thus leading to a mismatch problem. The issue was whether the carrier was obligated to replace the damaged shingles with substantially similar shingles or to pay for new shingles for the entire roof. Trout Brook S. Condo. Ass’n v. Harleysville Worcester Ins. Co., 995 F. Supp.2d 1035 (D. Minn. 2014). The Harleysville RCV policy provided coverage which obligated it to pay for the property’s “replacement cost,” defined as:

(1) “the cost of repair or replacement with similar materials for the same use and purpose, on the same site,” or

(2) “the cost to repair, replace, or rebuild the property with material of like kind and quality to the extent practicable.”

Harleysville claimed only partial damage to the roof and allocated $21,000 for roof repairs, but the insured’s construction expert believed the roof had to be entirely replaced at a cost of more than $800,000. In addition, the shingles were no longer being manufactured. The insured sued, arguing that the unavailability of matching shingles entitled it to full roof replacement. The court noted that the “covered property” under the policy was defined as the buildings (rather than the individual items on the property) and held there was a jury question as to whether the building suffered a loss on account of the unavailability of matching roof shingles. Whether Harleysville was able to replace shingles with shingles of a “like kind and quality” hinged on whether the unmatched shingles would provide an acceptable aesthetic result, and that had to be determined by a jury. The idea is that property that has not been physically damaged may become “damaged” where replacement of physically damaged property does not lead to an aesthetic result acceptable to the insured. It suggests that the carrier has an obligation beyond repairing the functionality of the damaged property, by paying to repair the aesthetics of the building.

Notwithstanding any insurance regulations that control the issue, a carrier’s obligation to pay for matching depends on the policy language and hinges on whether the loss payment and valuation terms of the policy can be read to obligate the carrier to match the replacement materials. The industry’s response is that allowing coverage for matching provides a windfall to the insured. To allow for full replacement of matching roofing and siding can be unduly burdensome on a carrier whose policy agrees only to repair damaged portions of the building.

Terms of Insurance Policy

The terms of insurance policies vary greatly and are extremely important to determining the carrier’s obligations in a claim which involves a “matching” concern. The current ISO HO-3 and HO-5 and company-specific policies contain “Loss Settlement” provisions which provide for payment of the “replacement cost of that part of the building damaged with material of like kind and quality and for like use.”

Individual insurance companies may have a variety of other standard terms included in their policies. Some policies may have other terms, conditions, and/or definitions which attempt to address the “matching” or “uniformity” issue and limit exposure in such situations. Some policies even contain “Roof Surfacing Loss Percentage Tables” which address the percentage of a roof the carrier will be obligated to replace as a function of the roof’s age and type of roofing surface material. Overshadowing all of the above are a patchwork of insurance statutes and regulations which attempt to govern claims which have a “matching” or “uniformity” component to them.

In response to a proliferation of “matching” claim issues, many insurers have begun inserting language in their policies that expressly precludes the coverage requirement of matching based upon color, a change in product specifications, or other factors, in an attempt to circumvent this clear precedent. Many states have statutes, insurance bulletins, or case law that directly address matching issues, but many do not.

Insurance Statutes, Regulations, and Case Decisions Governing Matching Claims

In an effort to provide uniformity and predictability in this area, many states have passed insurance statutes, rules, and regulations that govern the handling of matching claims. An Ohio regulation states that when “an interior or exterior loss requires replacement of an item and the replaced item does not match the quality, color, or size of the item suffering the loss, the insurer shall replace as much of the item as to result in a reasonably comparable appearance.” O.A.C. § 3901-1-54(I). In Kentucky, a regulation says that if “a loss requires replacement of items and the replaced items do not reasonably match in quality, color, or size, the insurer shall replace all items in the area so as to conform to a reasonably uniform appearance,” although the courts have not applied the regulation in private litigation. 906 Ky. Admin. Regs. § 12:095 § 9(b). Whether the statute or regulation applies, and whether the insured can bring a private right of action under the applicable statute or regulation, are also significant issues.

The National Association of Insurance Commissioners (NAIC) has drafted a model law called the “Unfair Claims Settlement Practices Act.” It is a consumer-protection law that prevents insureds from predatory and unfair claims settlement behavior on the part of insurance companies. Most states have enacted their own version of this model law, and the specifics of each such law vary from state to state. The NAIC Unfair Property/Casualty Claims Settlement Practices Model Regulation (MDL-902, 1997) has a section which reads as follows:

Section 9. Standards for Prompt, Fair and Equitable Settlements Applicable to Fire and Extended Coverage Type Policies with Replacement Cost Coverage.

  1. When the policy provides for the adjustment and settlement of first party losses based on replacement cost, the following shall apply:

(1) When a loss requires repair or replacement of an item or part, any consequential physical damage incurred in making such repair or replacement not otherwise excluded by the policy shall be included in the loss. The insured shall not have to pay for betterment nor any other cost except for the applicable deductible.

(2) When a covered loss for real property requires the replacement of items and the replacement items do not match in quality, color or size, the insurer shall replace items in the area so as to conform to a reasonably uniform appearance. This applies to interior and exterior losses. The insured shall not bear any cost over the applicable deductible, if any.

On the other hand, subsection (B) governs ACV policies and reads as follows:

  1. B. Actual Cash Value:

(1) When the insurance policy provides for the adjustment and settlement of losses on an actual cash value basis on residential fire and extended coverage, the insurer shall determine actual cash value as follows: replacement cost of property at time of loss less depreciation, if any. Upon the insured’s request, the insurer shall provide a copy of the claim file worksheets detailing any and all deductions for depreciation.

(2) In cases in which the insured’s interest is limited because the property has nominal or no economic value, or a value disproportionate to replacement cost less depreciation, the determination of actual cash value as set forth above is not required. In such cases, the insurer shall provide, upon the insured’s request, a written explanation of the basis for limiting the amount of recovery along with the amount payable under the policy.

While Section A of the above regulation establishes a guideline for the insurance company to follow with regard to the payment of claims involving “matching” or “uniformity” issues, it doesn’t necessarily mean that a carrier in any individual state must adhere to those guidelines or that the regulation works to the advantage of a property owner who has been wronged by a carrier who simply ignores the regulation.

Private Right of Action

Most states have case decisions that state that an individual homeowner/insured does not have a private right of action under a state’s statute or regulations governing unfair claims settlement practices and the handling of a “matching” or “uniformity” issue. As an example, in California, the case of Rattan v. United Services Automobile Association, 101 Cal.Rptr.2d 6 (Cal. App. 2000) involved a home damage by fire. United Services Automobile Association (“USAA”) allegedly breached the terms of policy in adjusting the loss, and the insureds claimed that it violated requirements imposed on carriers under regulations established by the Department of Insurance. The Court of Appeals disagreed, stating:

Even in first party insurance cases, neither the Insurance Code nor regulations adopted under its authority provide a private right of action. (Zephyr Park v. Superior Court(1989) 213 Cal.App.3d 833, 839 [262 Cal.Rptr. 106].) Thus, any particular violation of the regulations does not require a finding of unreasonable conduct. (See California Service Station, etc. Assn. v. American Home Assurance Co.(1998) 62 Cal.App.4th 1166, 1175-1176 [73 Cal.Rptr.2d 182].) Rather, as the trial court stated, at most the regulations, which were in evidence, may be used by a jury to infer a lack of reasonableness on USAA’s part. Because given as instructions the regulations would have suggested to the jury that any violation of the regulations was per se a breach of contract or an act bad faith, rather than only evidence of a breach or bad faith, the trial court was fully warranted in rejecting them.

Simply because a state requires carriers to follow a regulation such as the one above doesn’t mean that an individual homeowner (private citizen) has a “private right of action” under the statute or regulation.

Defenses to First-Party Matching Claims

The arguments most effectively used by carriers in combating matching claims include the following:

  • The property lacked uniformity prior to the covered loss, it would be impossible to “conform” any replacement items to an existing “reasonably uniform appearance” and, therefore, the obligation to match the replacement items under the regulation was not triggered;
  • The lack of a reasonably uniform appearance prior to the covered loss was the result of causes that were excluded under the policy so there was no obligation to replace all the existing items because it would represent an unjust windfall to the insured;
  • Even if a matching regulation or obligation applies to the insured’s loss, the evidence establishes that the repair can be performed such that a reasonably uniform appearance can be maintained;
  • The replacement items can be matched to conform to a reasonably uniform appearance because “reasonably uniform appearance” is analogous to “like kind and quality.” The area that must be replaced to conform to a reasonably uniform appearance is less than the entire property (immediate area, slope section, line of sight); and
  • The regulation is not enforceable because it does not create a private right of action.

Much will depend on the court’s and the parties’ understanding of terms such as “like construction and use” or “reasonably uniform appearance.” The “fine print” terms, conditions, and/or definitions of the policy will factor into the “matching” or “uniformity” issue and could limit exposure in such claims.

Cosmetic Damage

While the “matching” issue involves repairing truly “damaged” or “destroyed” property and the ensuing problems that result when the repaired section of a roof, siding, or cabinetry, for example, does not “match” the remainder of the roof, siding, or cabinetry in appearance. “Cosmetic” damage, on the other hand, is a related subject, but differs in that it involves dents, scratches, or other minor imperfections to property which result from a loss, that do not rise to the level of being truly “damaged.” In other words, it is a qualitative difference. The damage is so minor that it is only “cosmetic” and affects only the appearance of the property in a very minor way. Such cosmetic damage does not cause any punctures, leaks, or loss of functionality of a particular piece of property. An example would be dents in a metal roof resulting from a hail storm.

Insurance policies vary, and some include exclusions for “cosmetic damage” or “appearance damage” to property. While not every home or business policy currently includes these kinds of exclusions, a growing number of major insurers have started including them in their policies. One policy might cover cosmetic damage while another will exclude it, while technically covering direct physical lossfrom hail, even if the homeowner’s insurance policy doesn’t distinguish between cosmetic and other types of damage and such damages are usually covered. However, some homeowner’s insurance companies are introducing endorsements which may exclude cosmetic damages. The two organizations that standardize forms and policies for property/casualty insurers, the American Association of Insurance Services (AAIS) and the Insurance Services Office (ISO), have both filed cosmetic damage endorsements. The endorsement also enables the insurer to exclude one component – such as the roof – separately. These are becoming common with homes that have metal roofs.

In practice, what the insurance company considers cosmetic damage as opposed to functional damage is rarely straightforward. In the example of the dented metal roof, what happens if the dents have subtly affected drainage, runoff, or seals? For example, it is not easy to differentiate cosmetic from functional damage on traditional and architectural shingles. Insurers will argue that a few dings to the surface do not compromise the shingle structure, but the storm-chasing roof sales industry will argue that any localized loss of mineral will expedite the demise of the shingle. Profitability in homeowners’ coverage has become a multi-faceted, politicized, and elusive objective in many states. Regulators, politicians, and consumer advocacy groups with little understanding of how insurance works can present significant obstacles to obtaining appropriate rates for such policies and risks.

Recovery of RCV Matching Claim Payments in Subrogation Actions

Subrogation claims traditionally involve an insurance company stepping into the shoes of an insured and proceeding against the third-party tortfeasor who caused the loss in the first place to recover those claim payments. The subrogated insurance company (subrogee) assumes the same rights against the tortfeasor as the insured possessed — no greater, no less. The tortfeasor can usually employ any defenses against the subrogee that it could have employed against the insured. As a result, the measure of recovery (i.e.,damages) for the subrogee is the same measure of damages as for the insured. This creates some unique and troubling issues when the law dictating third-party damages recoverable in tort are different from the measure of a first-party claim payment under a policy and/or applicable law or regulations. An insurance company that has paid additional damages in order to address “matching” problems in a first-party claim may or may not be able to recover those damages in its subrogation tort action against the tortfeasor/defendant. The law varies from state to state.

If a carrier pays for full replacement cost of a house or a portion of a structure, it might nonetheless be limited to recovering the “market value” or difference in market value before and after a loss, in a subsequent subrogation tort action. Whether a tort defendant is liable to a subrogated carrier for the additional claim payments necessary for the damaged property to match and be uniform after repair depends on the state. Reimbursement under an RCV policy is likely to lead to an economic betterment of the insured because it means that payment will be made to replace old, depreciated property with new property. Therefore, subrogated carriers cannot always count on recovering all of the claim dollars they have paid out. Liability carriers will argue they are only responsible for ACV or repair costs. Some states allow for recovery of the full cost of repairs without a reduction for depreciation or betterment, where the repairs do not materially increase the value of the property over its market value prior to the loss.

You can view a chart that summarizes the regulations or laws in all 50 states regarding the matching issue in the payment of first-party insurance claims HERE. This chart focuses on homeowners’ claims and only tangentially discusses commercial property policies/claims, although if law regarding a commercial policy is all that is available, it is included. It does not address whether damage alleged to be purely “cosmetic”, such as dents to a metal roof caused by hail, is covered “direct physical injury” or the issue of upgrades required by changes in modern zoning or building codes. It also does not address whether an individual private homeowner has a “private right of action” under the law of each state to mandate compliance with these regulations by an insurance company in a first-party RCV property damage claim or if a subrogated insurance carrier can recover the full RCV matching claim payments it has made in a civil subrogation tort action filed against a responsible tortfeasor.